Wednesday, August 12, 2009

Why So Many Stock Market Crashes Occur in the Fall

WSJ's Brett Arends calls the period between Labor Day and Halloween the fright show, and with good reason.

He lists the following stock market crashes that have occurred during this period:
It was, of course, in September last year that Lehman collapsed and everything fell apart.

But then it was also September-October 2002 that the last bear market plunged to its lows.

The 1998 financial crisis? It began late August, and rolled on for two months.

The famous crash of 1987 came in October. But most people have forgotten that the market actually started sliding downhill in late August.

That's almost exactly what happened in 1929 too. The big crash came in October, but the market peaked just after Labor Day. Prices began falling through September, then tumbled further still.

The worst month of the Depression? September, 1931, when the Dow fell about 30 percent.

It was also in September, 2000, that the bear market really got going.

The 9/11 crisis, of course, came in September. That was hardly caused by investors. But what is forgotten is that the stock market was already looking wobbly. In the two weeks before the terrorist attacks, the Standard & Poor's 500-stock index fell 7 percent.

The great panic of 1907? October.

The great crash of 1873? September.

Since 1926, investors have lost nearly one percent on average during September, according to market data tracked by finance professor Kenneth French at Dartmouth's Tuck School of Business. It's the only month with a negative average return.. For each of the other 11 months, investors gained nearly one percent on average
From there Arends can't seem to find an explanation for the fight show down trend. He writes:
As for the causes of a possible September effect, most are stumped.
Well, there is one theoretical explanation. I have been promoting it for years (as far as I know I am the only person doing so). I most recently wrote about my theory in July, when I warned: Stock Market "Hurricane Season" Just Ahead

My theory is a spin-off from Austrian Business Cycle Theory. ABCT says that the business cycle is the result of a central bank pumping money into the capital goods sector of an economy away from the consumer goods sector. It is, in other words changing the consumption-savings ratio in favor of savings (i.e. capital goods spending, including stock market purchases). When a central bank stops printing money, the ratio begins to revert to its pre-money printing level. Thus money moves away from the capital goods sector (including the stock market) and towards consumption. Thus, the business cycle and stock market crash--as money is drained from these sectors.

Something of a seasonal ABCT impact occurs every year in the late-August to late-October period. Money moves away from the capital goods sector towards the consumption sector, not because of central bank money manipulations but because of natural trends away from savings towards consumption during this period. This is what I wrote in July:
August begins the start of seasonal down trend in the market...

It is not an accident that so many stock market crashes occur in October, it is the period of great consumer intensity away from savings and toward consumption. New school clothes, winter clothes and preparation for Thanksgiving and Christmas. From mid-August to December, October is at the vortex of a shift toward consumer buying, away from savings--which includes stock liquidation.
What does all this mean for the coming "Hurricane Season"? As I continue to warn, not only are we moving into the seasonal period where there is a propensity to increase consumption, but the Fed is not printing money. That's the real Bad Mama. This year they are both coming at us at the same time, which means you have to be pretty insane to own any stocks in coming months.


  1. Wenzel,

    ANY stocks, or just US stocks?

  2. It's tough enough for me to figure out what is going on in the U.S., never mind Istanbul.

  3. If such a scenario came to pass, foreign stocks would seem even worse. I hope my logic is wrong but here it is.

    I've used various foreign stocks (ADRs) as a hedge against a falling dollar in the past but I've mostly divested of them over the past month. If there is short term drop in money stock growth, the dollar could get a bump which would devalue ADRs.

    Assuming the dollar's secular devaluation continues, ADRs will outperform US stocks.